David J. Turner, Jr.
Senior Executive Vice President Chief Financial Officer at Regions Financial
Thank you, John. Let's start with the balance sheet. Average loans grew 3%, while ending loans grew 5% during the quarter. Average business loans increased 5%, reflecting broad-based growth across all businesses and industries. A majority of the growth this quarter was driven by existing clients accessing and expanding their credit lines to rebuild inventories and to expand their businesses. While still below pre-pandemic levels, commercial line utilization ended the quarter at approximately 44.4%, increasing 50 basis points over the prior quarter.
Loan production also remained strong with linked quarter commitments up approximately $5.5 billion. Importantly, being into this commercial loan growth, we're maintaining a very high asset quality portfolio. In fact, balances considered investment-grade equivalent are up 30% compared to a year ago and approximately 44% of our total commitments are also considered investment-grade equivalent, representing its highest level on record. Similarly, our overall probability of default in this portfolio has improved approximately 35 basis points since mid-2019. Average consumer loans remained relatively stable, while ending loans increased 3%. Growth in average mortgage and other consumer was offset by declines in other categories. Within other consumer, EnerBank loans grew approximately 7% compared to the first quarter. As a reminder, EnerBank has a track record of well-controlled loss rates throughout multiple cycles, and primarily originates prime and super prime loans to homeowners who tend to be lower risk borrowers.
Looking forward, we currently expect to hold total loans relatively stable over the remainder of the year, which would result in full year 2022 average loan growth of approximately 8% compared to 2021. This assumes a slowing rate of growth compared to the second quarter, but also assumes increased capital markets activity in the back half of the year.
So, let's turn to deposits. Deposit balances acquired throughout the pandemic remained mostly stable early in the Fed's tightening cycle. Importantly, seasonal patterns related primarily to the income tax payments returned to those experienced prior to the pandemic. While average deposit balances grew, ending balances declined. Ending consumer deposits were mostly stable, while Corporate and Wealth Management balances decreased approximately $1 billion each. In addition to seasonal patterns and in line with our expectations, the declines also include certain commercial and wealth clients beginning to reduce some of their excess balances. We continue to expect a range of $5 billion to $10 billion of overall balance reduction for the full year of 2022, resulting from tightening monetary policy. The combination of our legacy deposit base, along with the more stable components of surge deposits, represents a significant opportunity for us as rates continue to increase.
Let's shift to net interest income and margin. Net interest income grew $93 million or 9% linked quarter, evidencing strong balance sheet growth and asset sensitivity in a rising interest rate environment. Cash averaged $22 billion during the quarter, and when combined with PPP, reduced second quarter's reported margin by 38 basis points. Our adjusted margin was 3.44%. The reduction in cash this quarter resulted mostly from strong asset growth, both loans and securities, as well as seasonal deposit outflows. Average loan balances grew $2.9 billion or 3% in the second quarter. Additionally, $1.2 billion of securities were added. The recent increase in rates have certainly validated our decision to wait on a better rate environment to deploy cash into securities. While not included in our current outlook, additional security purchases would provide incremental benefit. The primary driver of net interest income growth this quarter was higher interest rates and our decision to remain exposed to rates in the near term. Importantly, deposit balance and yield outperformance, including a 5% cycle-to-date deposit data [Phonetic] allowed net interest income to grow by more than our previous guidance.
Total net interest income is projected to increase 8% to 10% in the third quarter, as expectations for rate hikes have been pulled forward, so has our outlook for NII. Fourth quarter net interest income is now expected to be approximately 23% to 25% higher than our first quarter. Regions' balance sheet remains well positioned to benefit from continuing increases in interest rates. Incremental 25 basis point increases in the Fed funds rate are projected to add between $40 million and $60 million over a full 12-month period as deposit betas are projected to increase into the 25% to 35% range. This NII benefit is supported by a large portion of stable deposit funding and a significant amount of earning assets held in cash, which compares favorably to the industry overall.
Over a longer horizon, a more normal interest rate environment or roughly a 2.5% to 3% Fed funds rate will support a net interest margin range of approximately 3.75% to 3.8%. This target incorporates the execution of recent hedging activity at higher rate levels than originally contemplated. While we have purposefully retained leverage to the higher interest rates during a period of low rates, we have begun to manage to a more normal interest rate risk profile as the interest rate environment normalizes. This includes the addition of $8.3 billion of forward starting received fixed swaps and a $1.2 billion of spot starting securities during the quarter. Through the first half of 2022, we have added $15 billion of swaps and securities. The swaps become effective in the latter half of 2023 and 2024, and have a term of generally three years. This represents approximately 75% of the total hedging amount expected this cycle. With a sizable amount of hedging complete, we will balance market rate levels and potential risk as we decide the appropriate time to finish the program.
Now, let's take a look at fee revenue and expense. Adjusted non-interest income increased 10% from the prior quarter, primarily due to improvement in capital markets and card and ATM fees. Within capital markets, growth was driven by higher fees and M&A advisory and real estate loan syndications, as well as a $20 million benefit from CVA and DVA. We continue to expect capital markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA. While we expect to be on the lower end of the range next quarter, we do anticipate activity will pick up in the coming quarters. Card and ATM fees reflect seasonally higher interchange on both debit and credit cards. Spend was up 3% year-over-year as inflation has impacted several categories, including a 30% increase in fuel, while discretionary categories such as retail goods, department stores and apparel are actually down.
Mortgage and wealth management income remained relatively stable during the quarter despite unfavorable conditions. Seasonally higher mortgage production overcame first quarter gains associated with the sale of previously repurchased Ginnie Mae loans. While we anticipated a decline in mortgage income relative to 2021, mortgage, as well as wealth management, will remain key contributors to our overall fee revenue. Service charges declined during the quarter as seasonal increases were offset by NSF and overdraft policy changes. The second phase of previously announced NSF and overdraft policy changes were effective at the end of the second quarter and the remaining changes will be implemented in the third quarter. These changes, when combined with previously implemented changes, are expected to result in full year 2022 service charges of approximately $600 million. We also expect to implement a grace period feature sometime in 2023 and now expect full year 2023 service charges of approximately $550 million. We expect 2022 adjusted total revenue to be up 7.5% to 8.5% compared to the prior year, driven primarily by growth in net interest income. This growth includes the impact of lower PPP-related revenue and the anticipated impact of NSF and overdraft changes.
Let's move on to non-interest expense. Adjusted noninterest expenses increased 2% compared to the prior quarter. Salaries and benefits increased 5%, primarily due to annual merit increases, which became effective on April 1st, higher variable based and incentive compensation associated with increased financial performance and better credit experience, as well as one additional workday in the quarter. These increases were partially offset by a decrease in payroll taxes and lower HR asset valuations. We will continue to prudently manage expenses while investing in technology, products and people to grow our business. As a result, our core expense base will grow. We expect 2022 adjusted non-interest expenses to be up 4.5% to 5.5% compared to 2021. Importantly, this includes the full year impact of recent acquisitions, as well as anticipated inflationary impacts. With the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 3% in 2022.
Overall, credit performance remained strong. Annualized net charge-offs decreased 4 basis points to 17 basis points. Non-performing loans increased modestly during the quarter, but remained below pre-pandemic levels at 39 basis points of total loans, while business services criticized loans and total delinquencies continue to improve. Provision expense was $60 million this quarter and included a modest build to our allowance for credit losses, attributable primarily to strong loan growth and, to a limited degree, general macroeconomic uncertainty, as well as some early signs of normalization within select commercial sectors. Our allowance for credit loss ratio is 1.62% of total loans, while the allowance as a percentage of nonperforming loans remains very strong at 410%. Our annualized year-to-date net charge-off ratio was 19 basis points, given increasing expectations for a slowing economy, combined with inevitable normalization, we are maintaining our full year net charge-off expectations in the 20 basis points to 30 basis point range, but currently expect to be towards the lower end.
Based on the recent stress test results, our preliminary stress capital buffer requirement for the fourth quarter of 2022 through the third quarter of 2023 is expected to remain at 2.5%, once our supervisory results are confirmed in August of 2022. We ended the quarter with our common equity Tier 1 ratio at an estimated 9.2%, reflecting continued strong loan growth, particularly during the last week of the quarter. And while loan growth remains our top priority for capital deployment, we expect to manage to the midpoint of our 9.25% to 9.75% operating range over time. Also, as John mentioned, our Board of Directors declared a quarterly common stock dividend of $0.20 per share, an 18% increase over the prior quarter, which reflects strong earnings growth.
So wrapping up on the next slide are our updated 2022 expectations, which we've already addressed. In closing, we have delivered strong year-to-date performance despite volatile economic conditions. We will continue to be a source of stability to our customers, but also remain vigilant with respect to any indicators of potential market contraction. Pre-tax pre-provision income remains strong. Expenses are well controlled, credit risk is relatively benign and capital and liquidity are solid.
With that, we're happy to take your questions.
